U.S. lawmakers mostly receptive to Delta-Northwest merger

MartinVaughan

WASHINGTON (MarketWatch) -- The chief executives of Delta Air Lines Inc.
DAL, +0.70%
and Northwest Airlines Corp.
NWA
found a mostly sympathetic ear on Capitol Hill Thursday in their bid to combine the third- and eighth-largest U.S. airlines by passengers carried.

But lawmakers warned that further consolidation among U.S. airlines may not be as welcome.

"I think this merger is a good one. On first glance, it makes some sense," said Sen. Charles Schumer, D-N.Y., at a hearing of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.

Schumer and several other lawmakers seemed persuaded by the CEOs' main argument that the merger is an "end-to-end" combination of two existing airlines that complement each other, and therefore will not result in hub closures or extensive service reductions.

However, Schumer added, "Some of the other airlines that might merge worry me a great deal."

United Airlines (UAL) and Continental Airlines
CAL, +1.13%
held talks towards a possible combination earlier this year. Industry analysts have speculated about a possible combination between AMR Group's
AMR, -2.56%
American Airlines and U.S. Airways
LCC, +0.00%

The Senate panel was convened to probe whether a Delta-Northwest combination would result in higher fares or less service, questions that the Justice Department will consider in its review of the deal expected to conclude by the fall.

Sen. Amy Klobuchar, D-Minn., said the Justice Department should consider the impact of those other potential mergers before it gives the green light to the Delta-Northwest deal.

"It is essential that [federal regulators] not review this merger in a vacuum, but consider its likely broader implications for the aviation industry and society as a whole," she said.

Lawmakers also wanted to know how the deal will affect current Northwest and Delta employees. Delta CEO Richard Anderson told a House subcommittee earlier Thursday that the merger will result in fewer than 1,000 layoffs, all corporate headquarters position from Northwest in Minneapolis or from Delta's Atlanta base.

Later in the day, under questioning from the Senate panel, he called the 1,000 figure a "very general number," a rough estimate, and added that "we have not done bottom-up analysis."

Anderson and Northwest CEO Douglas Steenland repeated their pledge that they will not close any Delta or Northwest hubs as a result of the tie-up.

But they hesitated to give assurances to lawmakers that service to some cities will not be cut, because continued high fuel prices make some future service cuts a likelihood, they said.

"The issue is going to be fuel," Anderson told the Senate committee. "Whether these carriers merge or not, fuel is going to be the determinant of how much capacity will be and what airlines will fly where."

The proposed deal was not without its critics Thursday, however.

"This is all leading up to us having two to three airlines in the whole country and I don't think that's good for anyone," Senate Majority Leader Harry Reid, D-Nev., said in a press conference on Capitol Hill.

He urged the Department of Justice's antitrust unit and any other federal agencies that have a role in reviewing the merger to closely examine what the merger's impact on competition would be.

The Department of Transportation has an advisory role to the Justice Department in reviewing airline mergers, but it doesn't get to approve or reject deals.

During the Senate hearing, Business Travel Coalition Chairman Kevin Mitchell said the Delta-Northwest merger would inevitably lead to other mergers, with consumers on the losing end.

"Let there be no doubt: Delta-Northwest is the proverbial canary in the coal mine," he said.

Mitchell also questioned whether the deal would produce any benefits outside of financial benefits for the airline executives. "How can there be billions of dollars in untapped cost savings at two airlines that just underwent years of cost cutting in bankruptcy?" he said.

Sen. Russ Feingold, D-Wis., urged the CEOs to resolve a dispute over combining pilot seniority lists, and give other employees a voice in shaping the new airline.

"I'm optimistic that between now and the time we close this transaction, we're going to be able to get that done with respect to the pilot groups," Anderson said.

The two CEOs made the case that the merger, which they said will yield about $1 billion in savings initially, is critical for the airlines to stay viable in the face of rising fuel costs and a weak dollar.

Rep. John Conyers, D-Mich., who chaired a separate hearing Thursday of the House Judiciary Antitrust Taskforce where the CEOs testified, said he was sensitive to those arguments.

"If the merger is rejected, we could end up with more carriers in bankruptcy, negating more union contracts with pension and health-care benefits," he said in an opening statement.

But Conyers added he also has reservations about the deal. "I'm concerned that if this merger is approved...we might end up with a situation where we have three mega-carriers operating through hubs competing with a handful of low-cost carriers," he said.

Congress has very limited powers to block the merger. The deal is under review by the Justice Department, which could decide by this fall whether to challenge the deal in court.

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